FIRPTA Changes Primer

Transcription

1 FIRPTA Changes Primer What They Mean for Buyers and Sellers of Real Property and for the Commercial Real Estate Industry Evan Liddiard, CPA Senior Policy Rep - Federal Taxation, NAR Linda Monaco, Legal Education Attorney, The Fund

2 What is the Foreign Investment in Real Property Tax Act?

3 Why Was FIRPTA Enacted? In late 1970s, Increased foreign investment in U.S. real property greatly alarmed some Americans Became national topic of discussion when 60 Minutes aired story about it Avalanche of letters to Congress demanding something be done

4 1979 Treasury Study

5 Basics of How FIRPTA Works Makes disposition of U.S. real property interest by foreign person subject to withholding Disposition is sale, exchange, gift, etc. Buyer required to withhold a portion of amount realized (generally the selling price)

6 Policy & Political Factors of FIRPTA Before FIRPTA, many foreign owners of U.S. RE not subject to tax on gains when sold FIRPTA was enacted to establish equity of tax treatment between foreign and domestic RE owners However, it has long been U.S. policy to welcome foreign investment of stocks, bonds, Treasury securities (and before FIRPTA, real estate) by not taxing capital gains

7 Policy Results of FIRPTA United States Behind in the Race for Global Equity Investment in Real Estate Cross-border buyers of commercial real estate, as a percentage of large transactions Domestic buyers 0 USA Japan UK Germany Source: Real Capital Analytics, Inc.

8 Policy Results of FIRPTA Real Estate Trails other U.S. Industries in Foreign Direct Investment Sector s share of total inbound FDI Source: Bureau of Economic Analysis

9 Coalition to Ease FIRPTA Rules

10 PATH Act of 2015 Protecting American Taxpayers from Tax Hikes Act Signed into law 12/18/15 Extended retroactively over 50 expired tax provisions Included FIRPTA provisions

11 FIRPTA Policy Changes to Increase Foreign Investment in U.S. Increase max holdings of foreign investor in U.S. REIT from 5% to 10% (without triggering FIRPTA) Commercial RE Allow foreign pension funds to invest in U.S. real estate without triggering FIRPTA

12 Now For The Details

13 Presumes All Sellers Are Foreign Corporation Sellers Estate LLC Land Trust Partnership

14 Creates Duty Of Buyer To Withhold And Remit Funds To IRS

15 Buyer Is The Withholding Agent And Settlement Agent Usually Completes Required Tasks

16 Applies To All U.S. Real Estate, Some Personal Property, Includes Rents

17 Current Withholding Rate Is 15%

18 Withhold 15% OF What? Amount Realized Contract Plus personal property associated with the use of the real property Also includes interest in mines, wells, standing timber, etc. Now for more details

19 How Do I Know If My Seller Is Ask Foreign Nonresident alien individual, or Foreign? Foreign corporation, etc. Not Foreign U.S. citizen Resident alien (legal permanent resident) Person who can meet substantial presence test Unsure, check with an attorney

20 How Do I Know If My Seller Is Foreign? Non-foreign persons will Produce picture ID Driver s license or Passport Sign an affidavit at closing with their social security number

21 Find Out Early If Seller Is Foreign Listing Agent always ask In negotiations for listing As setting up the property Cooperating Agent always ask Inquire when contract is complete

22 Seller Is Foreign What Next? As soon as possible notify Buyer s real estate agent Settlement agent

23 Find Out Early If Seller Is Foreign Settlement agent will help buyer with requirements May need help from CPA or attorney

24 Seller Is Foreign What Next? If seller does not already have an ITIN, they should apply ITIN Individual Tax Identification Number Can take 4 to 6 weeks to obtain All foreign buyers are required to obtain an ITIN since 2003

25 Seller Is Foreign What Next? Closing agent or seller s agent should prepare seller for the required 15% withholding Most foreign sellers are aware of the required withholding

26 Buyer s Duties Buyer will need Seller s ITIN for forms Closing will NOT be delayed if no ITIN

27 Buyer s Duties Fill in: Form 8288 Form 8288-A (one for each foreign seller) No ITIN use applied for in the specified blank

28 Buyer s Duties Submit Forms and Withheld funds to IRS

29 Buyer s Liabilities Buyer/Withholding Agent Liability Penalties for late filing Penalty up to amount withheld for failure to collect Liability for penalties up to $10,000 and possible imprisonment

30 Do Realtors Have Liability? Represent buyer or seller Advise: Planning Arranging Consummation

31 Do Realtors Have Liability? Yes Seller says he will lie about being foreign to avoid withholding Must give notice In writing Not to rely on statements and/or certifications by seller Then NO liability Failure to notify Lability up to the amount of funds received in the transaction

32 Is Withholding Required For A Short Sale Or When The Seller Is Yes Receiving No Money? Withholding is calculated from the contract price (generally) Check your sales contract may have a provision for such a situation

33 Seller Has No Money! Short sale No automatic reduction May apply for Withholding Certificate

34 Withholding Certificate Application Seller or Buyer applies and receives Withholding Certificate Reduce amount of withholding Eliminate required withholding Can be denied $$$

35 Withholding Certificate Apply soon Application Coordinate with closing agent No later than day of closing IRS can be slow to respond

36 Yes Are There Exemptions? Sale price $300,000 or less Residence Individual(s) to take title Buyer or family member will reside in property Minimum 50% of time occupied First two 12 month periods post acquisition

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38 More Details Exemption Requirements Limited use needs to pass 50% test Do not count vacant days in 50% test Can use if family member to occupy Mr. & Mrs. Buyer Buyer s Son Rental Vacant

39 More Details Exemption Requirements Buyers must sign an affidavit, under penalties of perjury that they (buyers) meet the requirements of the exemption If buyers do not comply with occupancy after sale, buyer could be liable for 15% of sale price, plus penalties and interest to the IRS

40 More Details Exemption Cannot be Vacant land Teardown Company purchase Requirements Commercial property IRS gives caution against pressure on buyer to sign affidavit

41 If Qualified For $300,000 Exemption, Withholding Rate Is 0%

42 Seller Will Need To File A Tax Return

43 What Has Changed?

44 New Rate

45 No Did Change Effect The $300,000 Exemption? Did not change how to qualify for the $300,000 exemption

46 New Reduced Withholding Rate! Sale amount over $300,000 and Sale amount up to and including $1,000,000 May qualify for reduced rate of 10% withholding

47 How To Qualify For Reduced Rate? Residence Individual(s) to take title Buyer or family member will reside in property Minimum 50% of time occupied First two 12 month periods post acquisition

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49 More Details Exemption Requirements Limited use needs to pass 50% test Do not count vacant days in 50% test Can use if family member to occupy Mr. & Mrs. Buyer Buyer s Son Rental Vacant

50 More Details Exemption Requirements Buyers must sign an affidavit, under penalties of perjury that they (buyers) meet the requirements of the exemption If buyers do not comply with occupancy after sale, buyer could be liable for 15% of sale price, plus penalties and interest to the IRS

51 More Details Exemption Cannot be Vacant land Teardown Company purchase Requirements Commercial property IRS gives caution against pressure on buyer to sign affidavit

52 If Qualified For Reduced Withholding Rate Is 10%

53 Seller Will Need To File A Tax Return

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55 For Smooth Closings Find out early is seller is foreign always ask Inform settlement agent and buyer of seller s foreign status Inform foreign seller of the required 15% withholding Use the $300,000 exception carefully Use the $1,000,000 reduced rate carefully Close on time and Be happy!

56 Questions?